Unveiling the Art of Harmonizing PE/VC Interests

This article discusses the important clauses found in private equity and venture capital (PE/VC) agreements in China, focusing on the underlying demands and interests of both investors and companies. The author analyzes four common types of clauses: conditions precedent, corporate governance, share repurchase, and valuation adjustment mechanism (VAM) clauses. The conditions precedent clauses outline the conditions that must be met before a transaction can be closed, providing some protections for investors and reducing uncertainty for the target company. Corporate governance clauses allow investors to have a say in major decision-making processes while still maintaining the target company’s operational autonomy. Share repurchase clauses protect investors’ exit strategies and investment returns while considering the long-term development of the target company. VAM clauses address any significant gaps between the pre-agreed valuation and the company’s actual performance, ensuring the interests of both parties. The article concludes that a well-designed set of PE/VC clauses can greatly reduce post-investment management costs and promote mutual benefits for both investors and startups.